Designing Pricing Plans for Subscription-Based Web Apps

By Ravi Pathak

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When your business model revolves around reoccurring subscriptions — which is a popular model for software as a service (SaaS) products like Basecamp, FreshBooks and CampaignMonitor — the most difficult part of generating revenue becomes getting users to sign up.

That’s where pricing plans — different subscription options with variations in price and features — play a pivotal role.

In this article, I will discuss a few tips and best practices for creating and testing pricing plans for web-based subscription services and apps.

Background

I had a great discussion on techniques and best practices for selling SaaS with DeskAway’s founder (and a very smart guy) Sahil Parikh.

The interesting thing I got from our conversation is something we already know is happening. IT — and thus, the Internet startup business model — is moving toward a reoccurring subscription-based economy.

Thus, designing an effective pricing plan for users has become of paramount importance more than ever.

Testing the Pricing Plan

I believe it’s extremely important to test your work and gather data for designing and improving on a product. Testing should be a primary priority in the creation of a web-based app or service, especially because improvements can be made at any time.

In the context of designing a pricing plan, it’s essential to check whether it works well for the target user base and to ensure that it generates your company the most optimal revenue.

How do you test the efficacy of a pricing plan? You can use A/B testing to discover differences in the number of sign-ups when you change a certain aspect of the pricing plan.

Google’s Website Optimizer is a free and very popular tool for A/B testing, and that’s what we use at my company to test pricing plans.

What to Test

You can test several components of your pricing plan. Let’s go through a couple of things we can test.

Price

What are the effects of increasing or decreasing the price of your software?

Test the validity of pricing ideas such as whether increasing your price leads to more sign-ups or if having the price end in a 9 (such as $49 or $19.99) increases, decreases or has no effect on revenue generation.

Number of Subscription Plans

There are ways in which you can create smart pricing plans that help your end-users choose an appropriate plan.

One of the ideas we tested was to have a mid-range plan that could lead more users to purchase our more expensive subscription plan.

This idea was inspired by professor of psychology and behavioral economics Dan Ariely’s observation that "most people don’t know what they want unless they see it in context."

"Like an airplane pilot landing in the dark, we want runway lights on either side of us, guiding us to the place where we can touch down our wheels," explained Ariely.

When people see different options, they start comparing them with each other. The hypothesis we tested was that people choose things relative to their neighboring options, and not in absolute terms.

Our idea was that the $69 plan would lead to more sign-ups for the $79 plan.

When we tested these two versions in Google Website Optimizer, this is what we found out:

With version B, we got about 9% more sign-ups for the $79 plan

Nobody bought the $69 plan

The interpretation of the results: When we provided the $69 option, potential buyers compared it with the $79 plan and found that it was more valuable.

What could have gone on in the user’s mind as he was choosing a plan to purchase? "For just $10, I’ll get another 2GB and social media branding/bookmarking."

Some Tips for Free Plans

We have largely talked about paid plans, so let us briefly discuss the topic of providing free plans along with paid subscriptions: the freemium business model.

The objective of the free plan is simple: to grow your number of users. The theory is this: when a company is just starting out, their needs aren’t the same as bigger companies and, almost certainly, their budgets are more restricted.

The freemium model reduces the risk to try and use your software. It eliminates a barrier of use (i.e., cost) for companies starting out and those that would like to field-test the software without monetary commitment.

Then, as they grow, and as their needs expand, they will upgrade their plan to one of your paid plans to match their needs. This is similar to how retail stores often offer reduced prices on certain items (called loss leaders) in the hopes of getting you in the store to purchase one of the regularly priced items.

The Forever Free Plan from MailChimp is a great example of using free plans to get sign-ups that can later on be converted to revenue through subscription upgrades.

How do you differentiate between free and paid plans? Through resource throttling. For example, MailChimp is free for up to 2,000 email recipients. If you have more email subscribers than that, you will have to upgrade your subscription plan.

An effective free plan lets users use all (or most) of the features of the app. For example, the popular file-syncing tool, DropBox, gives you every feature of the paid subscription plan, however, your resource is limited to 2GB of files instead of 50GB of files.

In addition, use the art of distinction to highlight the subscription plan that provides the user with the most bang for their buck. Give it a different visual treatment.

Similarly, if you find that you need to, you can deemphasize the availability of the free plan without discontinuing it. For example, the free plan of Basecamp, now a wildly successful web app, has reduced the visibility of their free plan.

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About the Author

Ravi Pathak is the co-founder of Tatvic. He manages conversion rate optimization and is involved in developing products like Liftsuggest. He is based out of Ahmedabad, India. Connect with him on Twitter @ravipathak and LinkedIn.

16 Comments

Great post, Ravi! Thanks for writing this. I’ve been researching subscription plans, as opposed to one-off sales. Having recurring monthly revenues would be a welcome bit of consistency compared to wildly fluctuating normal sales.

For a follow-up article, maybe you could compare different billing and payment apps for subscriptions. A good example would be Chargify.

Really great wrap up. The whole software as a subscription model has really taken off these last few years and the competition is heating up.
If you’re looking at competing against the market leaders you will definately need to test and retest the functionality and pricing structure.

Great article! I think the A/B testing is really what’s important. We’re in the middle now of actually deciding if we do a free plan or not. I’m wondering how effective those plans are and the percentage of how many actually convert into paid plans.

Great post, Ravi. One thing I’d love to explore is which design elements are most effective for different types of models. For example, the decoy tier you used (the $69 tier) can be implemented in a similar way for the freemium models.

I wonder if there are a couple of elements that work well for one type of model but not others. Possibly a follow up post?

Ravi an awesome post, I keep hearing that if you give people 3 options they will pick the middle option but very interesting discovery that they avoid it.

Any further data on the life time value of those customers?

I’m a fan of the freemium model as it reduces the risk for people to use your platform, the only downside is that your have to judge the risk that the company may moved the bar and kill off the free platform when it suits them at sometime in the future.

I have to agree with the others…awesome post, and timely for that matter. Many would say that subscription models are the future for all business. Whether you believe that or not, there is sufficient evidence to the potential profits. I think you have hit the nail on the head…test, test, test. Thanks for the info.

I have a subscription model site and have been wondering if I need to change the pricing options, so stumbling across this article is perfect timing for me as well! Currently my site only has one option (I like to keep it simple!) – but I do wonder if maybe if there were 2-3 options I could get more signups.

Do you have any thoughts on recurring vs. one time payment subscriptions? Or length of subscription? (IE: 1 month, 6 months, 12 months, lifetime?) I am wondering if maybe if I did a 1 year, one time payment subscription if it would convert better than an automatically renewing one – and if it should be priced the same or slightly higher. Of course the only way to know for sure is to test – but if anyone has thoughts I’d love to hear them!

Hi Everyone, Thanks for all the inputs. Here are some of my responses.

@David : I havent ventured out in a project to calculate lifetimevalue of customers, but I think this is great idea.I’d follow up if I find/do something on this.

@Kevin : Do let us know if you add an additional option & find it valuable.

@Doug : Which design elements works better? Yet to be there ,but are you referring to some specific element ideas that you’d suggest that should be tested. If you can let me know, I’d be really keen to see they can be tested.